Time, space and a permit quagmire

Jun 04, 2011

Ben Aris

Drawing by Niyaz Karim

One of the things
that strikes me most about talking to first-time visitors to Russia is how
surprised they are at how “normal” it is. To be fair, they arrive in Moscow,
which is pretty normal compared with the regions. But even in the regions,
things are becoming far more navigable and familiar.

The same thing happened to me during a recent trip to Ufa, the capital of
Bashkortostan. I was surprised at how normal the city was. Visitors, this
long-term expatriate Russia resident included, labour under the impression that
there are little spurts of reform and then a return to the status quo, when
what is actually going on is continuous (albeit volatile) progress towards
convergence with the rest of Europe.

Take, for example, an op-ed that the Swedish economist Anders Åslund recently
wrote that made a typical comparison of Russia with Estonia. The conclusion was
obvious: Estonia has clearly gone a lot faster than Russia, and the implication
is that the Kremlin doesn’t want to push through reforms because all the fat
cats are too busy filling their pockets or locking up uppity oligarchs that get
in their way.

This comparison is not fair, to the point of being useless. The obvious
difference is the size of the two countries: you can fit Estonia’s entire
population of about 1.5 million people into my suburb of Moscow and still have
space for the park. Put another way: how do you police the progress of reforms
in Vladivostok from Moscow when your subordinates are working seven hours out
of sync with Moscow because of the time difference?

The local administration on the Pacific coast is asleep when the Kremlin,
closer to the Atlantic coast, is awake and vice versa. Is it possible to run a
region bigger than most countries by e-mail?

To give you a more concrete example: I interviewed the late Estonian president
Lennart Meri in 1995. He told me that he had decided that he needed to reform
the bank sector, so he picked up the phone to the chairmen of the four biggest
banks, all based in the capital Tallinn, and an hour later they met in the
lobby of the best hotel in town and thrashed out the details over tea. Russia
at the time had several thousand banks spread over 11 time zones, most of which
were at best corporate treasury departments; at worst money- laundering
operations.

Geography makes a huge difference to the ease of reform, but this is probably
only the second biggest problem that Russia’s reform effort faces. I had
another illuminating conversation over dinner with Ruben Aganbegyan, the new
chairman of the Moscow Interbank Currency Exchange (Micex ) : “ The problem
with Russia is that it has a permissive system of laws and not a preclusive
system like in the West,” he observed.

This is a subtle point, but I think it strikes to the heart of why it is so
difficult to cut red tape, downsize the legendary bureaucracy and make an
impact on corruption in this massive country.

Central planning has bequeathed Russia a system where you have to get
permission for any market-based activity. Marxism demanded that all property be
communally owned, but Lenin quickly ran into trouble when he tried to ban money
in the early Twenties, and so the Politburo reintroduced commerce. However,
this business was always seen as “temporary” until the conditions for the
workers’ paradise could be created. As a result, business was an “exception”,
and you needed to get a permit to do it.

In the West, we stand the idea on its head: you are allowed to do anything that
is not banned by the state (like dealing drugs). Under this system, running
Vladivostok is actually pretty easy: you only need to make sure you have a good
police force that looks for people breaking the law.

The Russian system is a nightmare. Everything needs approval from Moscow –
which is usually asleep while you work; apparatchiks have to wake up in the
middle of the night to get permission from Moscow to set up a new company,
invest in a new project or dig a new oil well.

I don’t pity Aganbegyan. He is charged with turning Moscow into an
international financial center, an open and freewheeling bourse where capital
pursues profit in trades every few nanoseconds. And it’s just not possible
unless you get rid of the paperwork.

Changing this mentality will be a titanic struggle. Former economic development
and trade minister German Gref had a go at cutting permits in the early part of
the 2000s. He made good progress, according to a subsequent study by the World
Bank and the economic policy think-tank Cefir. The trouble was that hundreds of
regional authorities were still demanding permits that no longer existed in law
out of habit and because they were making good money out of issuing them.

But deeper than the graft is the mindset. In a land where the very real wide,
open spaces are such a major obstacle to change, it will probably take a generation
to shake off this bureaucratic equivalent of agoraphobia. This article was originally
published in The Moscow Times.